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Pressure on Electronics Component Suppliers is Building

Pressure to reduce automotive electronics component prices has never been so bad. The pressure is even worse than in 1992 when GM purchasing czar J. Ignacio Lopez de Arriortua was demanding price reductions of 20 percent or more from component suppliers.

“At the time, GM was the only company pushing that hard to reduce prices. Now we are seeing pressure from everywhere. All too frequently these days, a vehicle OEM comes up with some unilateral squeeze play to force prices down,” Fred Divincenzo, Motorola’s top automotive semiconductor marketer observes.

And it’s not just OEMs doing the squeezing. Faced with additional losses following its net loss of $352 million last year, in February 2003, Visteon came out with its own draconian proposal to force component prices down. In return for major new business, Visteon has asked plastic molders for significant prepayments of future price reductions. If the approach works with plastic molders, Visteon will tackle other product areas including electronics and electrical (E/E).

Based on reactions I’ve received from component makers, I would be amazed if many suppliers go along with Visteon’s plan, which looks a lot like bribery. Divincenzo also is skeptical: “We will do the best we can for our customers to meet their needs, but we have to be financially responsible. I’m not saying we don’t negotiate and make special arrangements, but we can’t give money away to win a sale.” In 1998, GM tried a plan it called “Current Savings,” which demanded up-front payments from its Tier-One suppliers. When suppliers protested and threatened lawsuits, GM abandoned the controversial and difficult to implement policy.

One reason why E/E component prices are in decline is that there always seems to be alternative suppliers willing to take on new business, even at deflated prices. That’s especially true today, as major semiconductor markets including communications, consumer electronics and networking have cooled, forcing semiconductor makers to consider the automotive business. Despite slower production at some carmakers, component sales to the automotive market have been relatively steady, thanks to the ever-increasing electronics content on cars and trucks.

Many suppliers are working more than ever on integration and material-substitution projects that further drive down costs. Jeff Peterson, marketing manager at hightemperature plastics maker BP Amoco Polymers, says, “We have an acceleration of requests from our customers to help them take cost out, usually in the form of price reductions.”

Brad Thinnes, vice president of R.O. Whitesell and Associates, a manufacturers’ rep and engineering company in Southfield, Mich., expresses his belief in the prominence of cost in the purchasing equations used by Tier-One customers. “As much as the major manufacturers preach that price isn’t the only issue, it comes down to cost in just about every single situation we get involved with. We often face unqualified, unproven competitors who are getting real shots at the business.” R. O. Whitesell sells displays and relays.

While some carmakers might lower their standards in order to achieve cost reductions, that is not at all the case with General Motors, which has lately increased its quality requirements on semiconductors in order to keep up with the Japanese. “GM is as serious about quality as they have ever been,” says Divincenzo. “I just came back from Asia last week visiting some U.S. tier-one suppliers. Everywhere we turned we got the same message: ‘Zero defects or no business’”. In a recent survey of its semiconductor customers, Motorola found quality ranked number one in customer requirements.

One supplier strategy to improve tight margins is to sell a higher proportion of products that are based on new technology; such products bring higher prices. But given the competition among suppliers and declining vehicle sales, technology isn’t selling so well today. “OEs are cautious when it comes to significant new technology,” explains Ivo Jurek, vice president of International Rectifier’s automotive business unit. Bob Lefort, president of Infineon U.S., agrees: “Carmakers and toptiers are all on these austerity programs, even with new safety products. It’s been very quiet.”

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